Abstract
A translog cost function is estimated to examine whether carriers use an efficient combination of inputs in the telecommunications industry. Special attention is given to the role of rate regulation reform in an increasingly competitive business environment. Findings suggest that telecommunications carriers facing price-cap regulation do use an efficient mix of labor and capital. In contrast, the condition for cost minimizing use of inputs is not met for telecommunications carriers facing rate-of-return. The superior factor input use allocation by carriers facing price-cap regulation compared to carriers facing rate-of-return regulation is interpreted as suggesting that incentive regulation plays an important role in promoting efficient use of inputs even in a competitive business environment.
Similar content being viewed by others
References
Abel, J. R., & Clements, M. E. (1998). A time series and cross-sectional classification of state regulatory policy adopted for local exchange carriers. Ohio: The National Regulatory Research Institute. NRRI 98-25, http://www.nrri.ohio-state.edu.
Ai C., Sappington D. E. (2002) The impact of state incentive regulation on the US telecommunications industry. Journal of Regulatory Economics 22(2): 133–160
ARMIS Filing System—ARMIS Preset Menu. Cited 3/12/2008. Available from http://fjallfoss.fcc.gov/eafs7/PresetMenu.cfm. Accessed 3/12/2008.
Averch H., Johnson L. L. (1962) Behavior of the firm under regulatory constraint. American Economic Review 52(5): 1052–1069
Bailey E. E., Malone J. C. (1970) Resource allocation and the regulated firm. The Bell Journal of Economics and Management Science 1(1): 129–142
Baron D. P., Taggart R. A. (1977) A model of regulation under uncertainty and a test of regulatory bias. Bell Journal of Economics and Management Sciences 8(1): 151–167
Baumol W. S., Kevorick A. K. (1970) Input choices and rate of return regulation: An overview of the discussion. Bell Journal of Economics and Management Sciences 1(1): 162–190
Binswanger H. P. (1974) The measurement of technical change biases with many factors of production. American Economics Reviews 64(6): 964–976
Blank L., Mayo J. (2009) Endogenous regulatory constraint and the emergence of hybrid regulation. Review of Industrial Organization 35(3): 233–255
Boyes W. J. (1976) An empirical examination of the Averch-Johnson effect. Economic Inquiry 14(1): 25–35
Bureau of Labor Statistics Data. Cited 3/12/2008. Available from http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUSR0000SA0&output_view=pct_1mth. Acc- essed 3/12/2008.
Christensen L. R., Greene W. H. (1976) Economies of scale in US electric power generation. Journal of Political Economics 84(4): 655–676
Courville L. (1974) Regulation and efficiency in the electric industry. Bell Journal of Economics 5(1): 53–74
Eakin B. K., Kniesner T. J. (1988) Estimating a non-minimum cost function for hospitals. Southern Economic Journal 54(3): 583–597
Eckenrod S. B. (2006) Incentive regulation in local telecommunications: The effects on price markups. Journal of Regulatory Economics 30(2): 217–231
Hyun-Deok S. (1994) The test of technology change, factor substitution and production structure adjustment of the Korean plywood industry. Journal of Rural Development 17: 181–197
Merrifield D. E., Singleton W. R. (1986) A dynamic cost and factor demand analysis for the Pacific Northwest lumber and plywood industries. Forest Science 32(1): 220–233
Oum T. H., Zhang Y. (1995) Competition and allocative efficiency: The case of the US telephone industry. The Review of Economics and Statistics 77(1): 82–96
Shin R. T., Ying J. S. (1992) Unnatural monopolies in local telephone. The Rand Journal of Economics 23(2): 171–184
Spann R. (1974) Rate-of-return regulation and efficiency in production: An empirical test of the Averch-Johnson thesis. Bell Journal of Economics 49(1): 38–52
State Telephone Regulation Report (2002a). Rate regulation of local providers in Northeastern and Mid-Atlantic states. Warren Communications News (20).
State Telephone Regulation Report (2002b). Retail rate regulation of local providers in South Eastern Great Lakes. Warren Communications News (20).
State Telephone Regulation Report (2003). Retail rate regulation of local providers in Northeastern and Mid-Atlantic States. Warren Communications News, 21(9).
State Telephone Regulation Report (2004a). Retail rate regulation of local providers in Northeast and Mid-Atlantic States. Warren Communications News, 22(15).
State Telephone Regulation Report (2004b). Retail rate regulation of local providers in Southeast and Great Lakes states. Warren Communications News, 22(16).
State Telephone Regulation Report (2004c). Retail rate regulation of local providers in Western US. Warren Communications News, 22(17).
Train K. E. (1991) Optimal regulation: The economic theory of natural monopoly. MIT Press, Cambridge, MA
Uri N. D. (2001) Technical efficiency, allocative efficiency, and the implementation of a price-cap plan in telecommunications in the United States. Journal of Applied Economics 4(4): 163–186
Uri N. D. (2002) The effect of incentive regulation in telecommunications in the USA. International Journal of Services Technology and Management 3(4): 441–462
Uri N. D. (2003) The adoption of incentive regulation and its effect on technical efficiency in telecommunications in the United States. International Journal of Production Economics 86(1): 21–34
Uzawa H. (1962) Production functions with constant elasticities of substitution. Review of Economic Analysis 29(4): 291–299
Wilson W. W., Zhou Y. (2001) Telecommunications deregulation and subadditive costs: are local telephone monopolies unnatural?. International Journal of Industrial Organization 19(6): 909–930
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Buranabunyut, N., Peoples, J. An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry. J Regul Econ 41, 181–200 (2012). https://doi.org/10.1007/s11149-011-9159-y
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-011-9159-y